First-time homebuyers: Finding great deals
(MoneyWatch) COMMENTARY It's been a long journey, but you've made it. You've assembled your team of real estate experts and scrounged up the necessary finances. Finally, it's time for the fun part: You can begin searching for a home.
This process is exciting, but it can also be discouraging. Your budget may not go as far as you planned, and you may end up sacrificing space or finishes to find a home you can afford.
But don't worry - in today's market, there are deals to be had, especially if you're willing to think outside the box.
First-time homebuyers: Building your team
First-time homebuyers: Financing your purchase
Here are five types of deals you should consider:
1. Short sales: A short sale, or pre-foreclosure, occurs when a lender agrees to accept an offer on a home for less than the home is worth. The lender accepts this lesser amount in order to avoid foreclosing on the home, which would result in a bigger loss.
Theoretically, lenders have the financial incentive to approve deals quickly when considering a short sale offer. If they hold out, lenders could wind up getting less money later, especially if the home goes into foreclosure. But things don't always move fast in this world, particularly if there is a second or third mortgage or equity line of credit on the property, since many lenders are backlogged with short sale offers and foreclosure paperwork.
Common problems: If you're interested in purchasing a short sale, be patient. Lenders may not be satisfied with accepting large losses, so haggling with them can be long and monotonous. Lenders are usually forced to take a 20 percent loss on a short sale, but that doesn't mean they won't keep potential buyers waiting as they hope for better offers to come in. That loss also means you may have to compete with investors who are looking to get a deal on a property they can rent out or flip.
2. Foreclosures: A foreclosure occurs when a lender closes out the loan on a property and takes back the property (the property itself is the collateral for the loan) because a homeowner cannot afford to keep making the mortgage payments. Lenders can only carry foreclosed homes on their books for five years, so they will eventually have to negotiate a deal and loosen their requirements before that time period is up.
Common problems: Many foreclosed properties suffer damage from neglect after sitting vacant for many months or years. Issues like mold, termites and overall filth could be present, so don't go in expecting move-in condition.
Don't forget to do your homework. Foreclosure doesn't always mean "cheap," so check comps in the area and get estimates from contractors about work that needs to be done. There are deals to be had on the foreclosure market, but do some research before bidding. The last thing you want to do is overpay for a foreclosure, because it could take years for the neighborhood to appreciate substantially in value from that point, and could still fall if a large number of foreclosures comes on the market all at once.
3. HUD homes: A HUD home is a foreclosed house with Federal Housing Administration (FHA) funding. Buying a HUD home is different from buying a typical foreclosed property. Interested buyers participate in auctions held exclusively online at hudhomestore.com. During the "offer period," potential buyers place their bids online. When the offer period ends, all bids are considered received at the same time and the highest offer is accepted.
Homebuyers have the upper hand, as the HUD bidding process begins with a 30-day "blackout period," allowing only owner occupants to place offers and keeping out investors aiming to turn a quick profit. If no one makes an offer, HUD lowers the price until an appropriate offer is received.
A real estate agent must be registered with HUD when representing you. In order to find the ideal agent to guide you through the process, research those who have winning bids under their belts.
Special financing deals are available for buyers who plan to live in the property (known as "owner occupied"):
The FHA $100 Down Payment Incentive Program: If you finance your home with FHA-insured financing, you are only required to make a $100 down payment on your HUD home in certain states. However, you are still responsible for closing costs.
Good Neighbor Next Door Program: Participants employed in certain professions, including law enforcement, teaching or the medical field, may be eligible to receive a 50 percent discount off of the appraised value of an HUD home. Visit the HUD website to see if you meet the requirements.
Feds move to speed home "short sales"
More options to rent your foreclosed home
Common problems: Being unprepared. Because the HUD home-buying process is so unique, you need to make sure you understand the bidding and financing processes. Make sure you have an agent who specializes in HUD homes and can walk you through the process, and make sure that you have the necessary paperwork and financing in advance. HUD homes may have as short as a 30-day contract, so knowing what documents and money is expected is key.
4. Rentals: The rental market is a hotbed of homes that may be available for purchase -- at the right price. Many investors are stuck with properties they can't sell, so they're renting them out as they wait for prices to rise before they sell. Some may not have originally intended to be landlords, and could be losing money just renting the home. If you make a desirable offer, you could snag a property that's not listed for sale and ready to move in.
You can find single-family rentals online on sites like Craigslist, RentJungle and Rentals.com. Ask friends and family for leads, too -- everyone knows someone who is in over their head on their mortgage. You might want to do a deal known as a "lease with an option to buy," also known as a "rent-to-buy." The goal is to negotiate the purchase price today, and then get the seller to credit a portion of your monthly rent check toward your ultimate down payment.
Common problems: Because you're going to the seller before the home is listed on the market, they may feel they have the upper hand and be difficult to negotiate with. While this won't always be the case, it might be helpful to have a sales agent to help you. If you choose a "lease with an option" type arrangement, be sure to use a real estate attorney to negotiate the purchase contract (which happens upfront), and spell out the terms of the downpayment and option fee credit, if any.
5. Fixer-uppers: Take a tip from real estate investors, who often purchase homes that could use improvements for a low price, fix them up and resell them for a quick profit.
You can use this same method when finding your home. Look through newspaper ads, flyers or the Internet for phrases like "fixer-upper," "needs work" or "diamond in the rough" and determine if these properties have potential. Also consider a smaller house with a large property: This tends to be cheaper than a larger house, and gives you an opportunity to expand later when you have the money.
Common problems: Make sure the necessary improvements are cosmetic and not structural - you don't want to spend tons of money fixing up a property when you could have bought a house in better condition at a better price. Get a thorough estimate of the desired enhancements and determine if improving a less expensive house is a good investment.
No matter what path you choose, make sure you do the necessary research. Don't be satisfied with Internet descriptions or photos; explore every property, ask any questions you can think of and take plenty of pictures. Consider the amenities and negative aspects of the neighborhood, district and town. To make sure you're getting a reasonable deal, compare prices between similar houses that have recently sold to those you are considering.
Don't make this process more stressful than it is. Approaching a house as your one-and-only "dream home" leads you to ignore the plenty of properties available that could be just as good of a fit with some renovations. Avoid disappointment by keeping an open mind and seeing the opportunities and potential in every home you visit.
Remember, this first home you buy probably won't be your last one.
